Existing NS&I customers will see their Isa interest rates increased from
0.5pc to 2.25pc in unprecedented move.

The Government-backed savings bank is to automatically switch customers in its older Cash Isa account into the new Direct Isa, which which pays a far more competitive rate of interest.

National Savings & Investments (NS&I) said it has 94,000 customers in its T Cash Isa (which was for those who had previously had Tessas) and its Cash Isa. Both accounts currently pay just 0.5pc interest, while the Direct Isa currently pays 2.25pc.

However, this switch will mean these customers will no longer be able to make cash withdrawals from these Isas at the Post Office, but will have to manage their new Direct Isa account by post, by telephone or online.

This is a complete turnaround on the usual banking model, where both banks and building societies regularly replace existing savings accounts with higher-paying alternatives to attract new customers, while reducing the returns paid on these superceded accounts. Most banks rely on the apathy of savers, who don't want to switch their savings on an annual basis, to make money: with the majority of customers left in older savings accounts that pay negligble rates of interest.

The fact than NS&I has bucked this trend will be particularly welcome news for savers at presnet, who are coping with the double whammy of historically low interest rates and rising inflation. This increase in Isa rates comes as most high street banks have slashed returns on paid on savings accounts in recent months.

NS&I customers will be automatically switched into this new account on May 25 this year.

Jane Platt, the chief executive of NS&I said that this move was part of the company's "modernisation programme".

"We have been working to simplify and modernise our range of savings product and to encourage our customers to invest with us directly.

"From May 25 customers holding our Cash Isa will benefit from the much higher interest rate paid on our Direct Isa. There will be some changes for our customers who use the Post Office – however staff in our UK-based contact centres will be on hand to help with the transition."

These changes will also affect the millions of customers holding Premium Bonds. From April 1 this year customers will no longer be able to buy Premium Bonds, using cash at Post Office counters, however, they will still be able to buy these bonds at the Post Office if they are paying by cheque or with a direct debit card. Premium Bond can also be bought directly from NS&I.

NS&I said it has seen an increase in the number of customers transacting directly with it, by post phone or online in recent years, and this has delivered savings for the taxpayer. As NS&I has become more of a direct business it has withdrawn products from the Post Office, so not only Premium Bonds remain on sale at these counter.

Ms Platt said that despite the fact the bank it boosting interest rate thousands of customers, these changes would enable it to further reduce running costs, and would deliver a 10pc budget reduction in its budget by 2015 – a requirement set down in the 2010 spending